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There can be advantages to
managing both tax-exempt and taxable mutual funds, says B. Clark Stamper, a senior vice
president at Selected/Venture Advisers Inc.
Since 1990, Stamper has managed the $187 million Venture Muni (+) Plus
Inc. fund, an eight-year-old high-yield municipal fund.
He also manages a high-yield corporate bond fund, a retirement fund, and a
government bond fund for the Santa Fe, N.M.-based Venture.
Keeping an eye on trends in the taxable fixed-income market, where
rates began peaking last year ahead of municipals, led Stamper to become more defensive
last fall and has helped make his funds top performers.
Recently, several companies ranked three of the funds that Stamper
manages among the top 10 best performers in their categories. CKA/Wiesenberger ranked the high-yield municipal
fund number one for the seven months ended July 31. The
funds, which Morningstar Inc. gives five stars, also is ranked as the top high-yield
municipal fund by Lipper Analytical Services Inc. for the year ended Aug 31.
In addition, Lipper ranked the retirement fund and the government bond
fund third and 10th respectively among all general U.S. government bond funds
for the year ended Aug. 31.
In an interview with staff reporter Sharon R. King, Stamper discussed
his defensive portfolio strategy and his outlook for many high-yield municipal credits.
Q: Give me a quick breakdown of
the Venture Muni Fund’s portfolio.
A: The cash level is about 2% right now (Aug
31). Triple A is about 18%; double-A is about
11%; single-A, 21%; triple-B, 13%; double-B, 5%; single-B about 0.3%. No triple C’s. Non-rated is 29%.
The average rating of the rated securities is still A-Plus. The average maturity is about 16 years. The average coupon is about 8.25%.
Q: No triple C’s?
A: Yes. On of the things I’m worried
about is a liquidity problem. I saw a little
bit in March this year, when the bond market was bottoming.
I was one of the only bidders on some double –A munis, about 10
different issues. These issues had come at
par maybe a month or two before, and I was bidding them in the mid-80’s. I was high bid and I picked up about three of
them. The rest didn’t trade. That was double – A quality. My worry is that if that type of this happens
again, if you had to sell, say, a non-rated bond or a lower-rated bond, you would hardly
even get a bid.
Q: So the liquidity problem wasn’t
based on the quality of the bond?
A: Well, there are two things. One is a
liquidity problem and one is that the credit quality spreads had tightened dramatically. Back in 1990, the spread from a triple – B to
a triple – A was about 150 basis points. It
tightened all the way up in late 1993 to about 35 basis points. So you weren’t really paid a lot to take the
extra risk.
Q: Your largest holdings are
healthcare, housing, and industrial revenue bonds. What
attracted you to those particular sectors?
A: I came out of the high-yield taxable area. And a lot of those health care bonds –
that’s a corporate credit and the industrial revenue bonds are corporate credits. Some of them are the same as the credits I have in
my (taxable) junk bond fund. What I found was
that I was probably one of the most knowledgeable people on corporate credits in the muni
area.
And not only that, there used to be huge values in that sector. In fact, on an after-tax basis, a lot of the munis
were trading maybe 100 to 200 basis points cheap to the taxable market. That was back in 1990. Since then it’s really tightened up and
they’re probably about even. So
I’ve lightened up. I had been about 40%
in that category. Now I’m about 25.5%.
Q: That’s on the industrial revenue
bonds?
A: Right. Housing would be the next largest,
at 21%. There are a lot of opportunities in
that sector, too, versus some of the other muni sectors.
There are a lot of higher-coupon housing bonds. Prepayments in the muni housing bond market have
been a lot less than the prepayments in the mortgage-backed area. So those seem to offer a lot more value.
Q: I noticed some Kmart and Kroger bonds in
the municipal fund. Are those tax-exempt?
A: Those would be industrial revenue bonds. I’ve
followed Kroger for 10
years on the junk bond side and have owned a lot of Kroger, although I used to be at my
maximum at 5% in Kroger, in my muni fund. Now
I’m about 3%. Q: In addition to the Venture Muni
Fund, you manage three other taxable funds. Do
you find it difficult to manage both tax-exempt and taxable funds?
A: Not really. Every once in a while
it’ll get a little hectic. Last year,
you had record muni issuance. You also had
near-record junk bond issuance. In the junk
market, the taxable market, a lot of times they were issuing bonds to take out old bonds,
so I knew the credits, though the capital structure would change a little bit. Last year, there also were a lot of new issuers in
the market so that created some problems. And
some of the same bonds, or companies, are in the muni market and in the junk market.
Q: Can you explain your investment
philosophy?
A: I use bottom-up credit analysis because we’re looking at riskier credits where
credit is important. I focus on the upside
potential versus downside protection of each individual investment for the
credit-sensitive bonds. I also look at the
upside potential versus downside protection on an interest rate prepayment or call risk
basis. And I do that in all the different
markets.
Q: As spreads continue to tighten,
are you finding it more difficult to find high-yield bonds for the portfolio?
A: I was, late in 1993. The higher the market
went, the tighter the spreads got, the more defensive I became. That’s when I was selling off what were
higher-yielding bonds with less credit quality spread and buying the higher-quality bonds
with less-yield. It turned out to be the
right thing. Now I’m seeing a bit of
the opposite, or some credit quality spread widening, especially in health care and also
in the industrial revenue bond sector.
Q: What’s the reason for that?
A: I think part of it is that people might be concerned that the economy isn’t as
strong as they thought it was. Part of it is
that instead of having big inflows into the market, where portfolio managers are just
buying everything they can because there’s kind of a shortage of bonds, now you have
the money flowing out slowly. In order to
make someone want to buy something, you’ve got to offer an extra bit of yield.
Q: Has insurance also taken away
bonds from the high-yield market as insurers reach to lower-rated securities to offer to
investors?
A: I haven’t really noticed that. My
insured percentage is pretty high; it’s about 20%.
Q: Is 20% in insured investments considered
a high percentage for a high-yield portfolio?
A: I would think so, definitely. But it has
to do with keeping the credit quality higher and the liquidity higher. In fact, I’m still able to achieve a
high-yield payout because of the bonds I have had real high coupon even though
they’re insured. Of course, yields are
subject to change.
Q: How are you positioned to take advantage
of the current market environment?
A: Well, it looks pretty good for a countertrend correction to about 7% on the long bond. So I bought a lot of higher-rated discount bonds,
like a double – A with coupon of 5.5% at an $87 price, or something like that. So that it could rally with the market. I’m not positive we’re going to get a
rally, but those (discount) bonds have better upside downside characteristics because of
the low dollar price.
Q: What kind of coupon levels do the new
cushion bonds have?
A: The oldest coupon is 8.25% probably up around that level, and, say 8%.
Q: What kind of coupons were you selling?
A: About 7.25%. Back then, I think the double
– A’s were trading at a 5.25% or something like that. Now they’re up around a 6.40%, something like
that. Those bonds that I sold, because they
were currently callable, they have almost no upside and they had a lot of downside because
the coupons weren’t that large relative to the market.
Q: Why don’t you own any Denver
airport bonds?
A: I bought it as a new issue probably three years ago and I sold it at a profit. There’ve been a lot of questions about
whether they really need the airport. I just
didn’t think the return was worth the risk. That
kind of risk is hard to quantify. There are a lot of other areas where I have much
more expertise, where I think I can get better upside-downside characteristics. I had owned quite a few different airports.
Q: Have you sold all of your airport bonds?
A: I don’t think I own many airport bonds. I’m
staying away from cyclical credits.
Q: Do you own any derivatives?
A: There are no derivatives in the muni fund. It
just didn’t look appropriate at all.
Q: What’s your interest rate forecast?
A: I think we’re going to see rates go to 7% in the short run, but in the long run I
expect them to go higher, say, above 8%, like an 8.20%, somewhere around there.
Q: Over
what time frame?
A: It could be at 7% within the month. I
would say it would take probably about a year from that level to reach 8.20%. I think until the economy really slows down, rates
won’t go down for any extended time. My
biggest fear is that the economy goes into a recession.
Q: Are you forecasting that?
A: Yes. The long bond is off about 20%. The stock market is only down about 3% from the
top. So I’d much rather own bonds than
stocks, but I think these rate increases, increased taxes and regulation pushed the
economy into recession. If the stock market
does fall by 500 points or more, I would expect that to impact credit-quality spreads
negatively and make them widen out. And
that’s another reason why I don’t own that many of the lower-quality bonds right
now.
Q: Are there any other sectors that
you would expect to perform well, that would aid the high-yield muni fund?
A: I think the housing bonds will do fine. A
lot of those are backed by Ginnie Mae or Fannie Mae or (the Federal Housing
Administration), where you don’t have much credit risk and a lot of them have higher
coupons.
Q: There’s no risk of prepayment on
those bonds?
A: The prepayment risk should be lessening if rates go up.
So you’d want to own the higher-coupon ones.
Q: What’s the availability of those
securities?
A: There are not many new issues. Most of
the action is in the secondary, old issues. That’s
where most of my trades take place.
Q: You mentioned that last year you
become more defensive. Was that because you
anticipated that rates would go up?
A: Well, this was one area where I got a play from being in the three different markets or
the four different markets. I owned a bunch
of utility bonds. So I watched the utility
market and index very closely and the utility index peaked in September and started going
down. I had been getting more and more
defensive because the aggressive investments were less compelling and the defensive
investments were getting better risk characteristics, upside-downside. And then the government market peaked in October,
so I started building cash in my two government mortgage-backed funds. Then the junk bond market peaked, say, in
December, so I was building cash or going defensive in all the funds. Then the muni market didn’t really peak until
January, so there was a pretty big lag and because I was in all the four markets, I could
see what was going on.
Q: When did you start raising cash in the
tax-exempt market?
A: In the tax-exempt market, there were enough alternatives that I didn’t really have
to build a cash balance. I could hide out in
these cushion bonds.
Q: The cash position that you have now in
the muni fund, is that relatively low to what it has been in the past?
A: No, that’s actually – it’s cash and accrued interest. I would say probably half of that is accrued
interest. I would say my average cash balance
is under 3% for the whole year.
Q: With your defensive stance, do you end
up giving up any returns?
A: You give us some upside potential. So if
the market rallies, you lag. If the market
stays flat or goes down, then you outperform.
Q: So you’ll continue your defensive
stance?
A: Yes, Overall, I’m defensive with some aggressive investments that I’d hope to
sell on a rally.
Q: In a flat to rising rate environment,
what type of securities do you think will do well for you?
A: The shorter-term, higher-coupon bonds, some that are trading to a call. If they don’t get called, then you get that
coupon for a longer period of time. |
